Market Insider

Guesstimating Potential Grain Production

In the past month, we’ve seen cash grain prices across Western Canada appreciate, mainly thanks to stronger futures markets. South America weather premium is helping drive a rally, as is continued dryness concerns in North America. First, the US Southern Plains remain fairly dry, albeit there Is some rain in the forecast before the end of February. Second, it’s a bit wet in parts of Brazil where they’re starting their soybean harvest, which will likely delay second / safrinha crop corn seeding. And finally, Argentina isn’t getting all the rains required to help alleviate the hot temperatures they’ve had, causing soybean and corn production guesstimates to be lowered.

The weather in Argentina is like “a big weather weekend in the US during July or early August.” Both corn and soybean crop ins Argentina are in key growing phases and the recent heat has stressed the crop. While we know that a little stress on the crop never hurt yield potential, there needs to be some soil moisture to accommodate said stress.

That being said, we’ve seen soymeal and soybean prices increasing on the Argentinian weather premium, but soy oil has been pretty reluctant to join the party. And since canola prices are often more aligned with soy oil that soybeans, it’s why you haven’t seen a proportionate rally for canola like we’ve seen in soybeans. The fact remains that the world has a very healthy supply of vegetable oils, and the substitution effects on canola are very real, especially in extremely price-sensitive markets like China.

Speaking of rising food kings in Asia, Indonesia has officially overtaken Egypt as the largest importer of wheat in the world. Also, Argentina’s wheat exports are now starting to displace those from the likes of Europe and the United States (sidenote: the Argentine wheat crop was grown before the heat and dryness hit the country). Russia is certainly still relevant, although, lately, Russian wheat has been in a bit of a slump. Looking forward though into 2018/19, there’s still a fair amount of bearish news coming out that relates to Russian wheat, namely decent snow cover. The EU wheat crop also has some decent snow cover, albeit rains in France have been a bit concerning. Acreage estimates there were recently cut by the French Ag Ministry to 12.25 million acres.

Ultimately, with the stronger futures prices as of late, and a stronger US Dollar, basis levels on wheat have started to widen in the US, limiting farmer sales. We’ve seen winter wheat prices come up more than spring wheat, mainly because the market is figuring out the appropriate spread between the two qualities. As such, this is why you’ve seen CPS wheat prices in Western Canada climb, whereas CWRS wheat prices have tracked mainly sideways. A record spread between high and low protein prices is just not sustainable.

Further, there’s some premium being added to winter wheat prices because of the aforementioned dryness concerns in the major producing regions. However, just not enough known about the US winter wheat crop, which, while we know is in dry conditions, is still in dormancy. We also know that the quality of the crop over the winter doesn’t correlate very well with what the final numbers are so if anything, the market is in pure speculation mode for the next few weeks until the crop emerges.